Finance Test

2. Which of the following is/are false?
I. The EBITDA multiple is useful in determining an acquisition price when a firm is considering buying another firm. 
II. The bid quote on a security from a dealer is always greater than the ask quote on a security. 
III. Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act as agents on behalf of their clients are floor brokers.
IV. The difference between the bid price and the ask price on a security is the asset factor. (Points : 3.5)

Question 3. 3. Which of the following is/are false?
I. A common-size balance sheet shows the firm's assets and liabilities as a percentage of total assets.
II. The average collection period is the average number of days an accounts receivable remains outstanding.
III. If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must increase its equity multiplier. 
IV. An average collection period substantially below the industry norm may indicate that the firm's credit policy is hurting sales by restricting credit to the very best customer. (Points : 3.5)

4. Which of the following is/are true? 
I. In an efficient capital market, all security investments will have a positive NPV.
II. In an efficient capital market, corporate diversification is inexpensive and necessary. 
III. The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price or return information is an example of weak-form market efficiency. (Points : 3.5)

Question 5. 5. Which of the following is/are false? 
I. The shareholder wealth maximization goal states that management should seek to maximize the compound value of the expected future returns to the owners of the firm.
II. The primary reason for the agency problem between the stockholders and managers is because of the separation of ownership and management. 
III.  Protective covenants in a company's bond indentures are used in agency relationships involving creditors and managers.
IV. Altman’s bankruptcy prediction model identifies five financial ratios to predict bankruptcy of firms. 
(Points : 3.5)

6. Which of the following is/are true?
I. Liquidity ratios indicate the firm’s capacity to meet its short-term financial obligations and long-term financial obligations. 
II. Financial leverage ratios indicate the firm’s capacity to meet its short-term financial obligations, but not its long-term financial obligations. 
III. Asset management ratios indicate how efficiently a firm is using its assets to generate sales.
IV. Profitability ratio indicates how effectively a firm generates profits on sales, assets and stockholder’s equity. (Points : 3.5)

Question 7. 7. Which of the following is true? (Points : 3.5)

Question 8. 8. Which of the following is true? (Points : 3.5)

9. After-tax cash flow equals: (Points : 3.5)

Question 10. 10. Which of the following is defined as the systematic allocation of the cost of an asset over a specified period of time? (Points : 3.5)

11. Mac Inc. is considering issuing additional long-term debt to finance an investment opportunity. Currently, Mac has $180 million in 14% debt outstanding. Its after-tax net income is $63 million, and the company is in 30 percent tax bracket. What is Mac’s current times interest earned ratio? (Points : 3.5)

Question 12. 12. Continued from Q11, Mac Inc. is required by debt holders to maintain its times earned interest ratio at 3.2 or greater. How much additional 14% debt can Mac issue now to maintain its time interest earned ratio at 3.2? Assume for this calculation that earnings before interest and taxes remains at its present level. (Points : 3.5)

Question 13. 13. Mr. Moore wants to purchase a new car. He knows that he can afford to pay $4,720 per year and that his bank will charge him 8% interest on the car loan. He intends to pay off the car in 8 years. Interest will be compounded annually.  Of the following, which is the most expensive vehicle in his price range that he could consider? (Points : 3.5)

14. Andy just won an $80,000,000 lottery in Washington. Instead of receiving a lump sum, he found that he would receive $3,200,000 annually (end of year) for 25 years. Andy is 65 years old and wants his money now. He has been offered $25,778,500 to sell his ticket. What rate of return is the buyer expecting to make if Andy accepts the offer? (Points : 3.5)

Question 15. 15. German Motors exports cars to the U.S. Market. On January 20, 2008, its most popular model was selling (wholesale) to U.S. dealers for $45,500 (US dollars). What price must German Motors charge for the same model on January 29, 2013 to realize the same amount of euro (€) as it did in 2008. ($0.9150/€ on 1/20/08 and $0.9950/€ on 1/29/2013) (Points : 3.5)

16. You are given the information of firm A and B for their performance evaluation.
Firm                                                     A                     B
Sales                                        25                    22
EAT                                                      6                      6
Total Assets                            50                    40
Stockholder’s Equity              25                    25
Suppose the industry average of net profit margin ratio, total asset turnover and equity multiplier is around 20%, 0.53 times and 1.6 respectively.
Which of the following is true?  (Points : 3.5)

Question 17. 17. A firm with an equity multiplier of 2.5, will have a debt ratio of (Points : 3.5)

Question 18. 18. If the spot rate for the Japanese yen is $0.0092 per Japanese yen and the 2-month forward rate is $0.0093 per Japanese yen, what is the annualized premium (discount) for the 2-month forward quote on the Japanese Yen, i.e., the annualized Japanese Yen forward premium (discount) relative to dollars? (Points : 3.5)

19. Three years ago you bought 100 shares of Pike Company’s convertible preferred stock at $40 per share. The preferred stock had an annual dividend of $3.50 per share, and a total of $8.25 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $45.25 plus accrued and unpaid dividends, for a total of $47.50. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.03 shares of Pike Company’s common stock for each share of preferred stock. If the closing price of Pike Company’s common stock is $47.00, what is your holding period return based on your optimal decision? (Points : 3.5)

Question 20. 20. You would like to endow a chair at Indiana University for $178,500 per year. At 12% interest, how much do you need to donate? (Points : 3.5)

Question 21. 21. What is the return on stockholders' equity for a firm with a net profit margin of 3.2 percent, sales of $525,000, an equity multiplier of 3.0, and total assets of $375,000? (Points : 3.5)

22. Sees Inc. has an agreement with it banks that allow Sees to borrow money on a short term basis to finance its inventories and accounts receivable. The agreement requires Sees to maintain a current ratio of 4.0 or higher and a debt ratio of 60% or lower. From the balance sheet, Sees has total assets of $1,375,000, current assets of $875,000, and total debts of $800,000 (consist of current liabilities of $198,750 and long-term debt of $601,250). Determine how much Sees could borrow this time to invest in inventory and accounts receivable without violating the terms of its borrowing agreement. (Points : 3.5)

Question 23. 23. Your monthly statement from your bank credit card shows that the monthly rate of interest is 4.8%. What is the annual effective rate of interest you are being charged on your credit card if it's compounded monthly? (Points : 3.5)

24. Over the past 10 years, your $15,000 in gold coins has increased value by 280 percent. You plan to sell these coins today. You have paid annual storage and insurance costs of $1520 per year. Assay expenses at the time of sales are expected to total $1450. What is your 10-year holding period return to this investment? (Points : 3.5)

Question 25. 25. In 2012, the JCrew Company's sales were $15.0 million. Its balance sheet at year end 2012 is shown below. JCrew's 2013 sales are expected to be $21 million. Earnings after tax is expected to be 10.0% of sales, and annual dividends of $800,000 are expected to be paid in 2013. The company presently has excess plant and equipment capacity. As a result, assume that the net fixed asset figure on the balance sheet will remain constant for 2013. Assuming that the ratios of assets (except fixed assets, net) to sales and accounts payable to sales in 2012 remain the same in 2013, calculate the total amount, i.e., one number, of external financing required for 2013, using the percentage of sales method.

            JCrew Co. Balance Sheet
(December 31, 2012)($ millions)
            Current assets:                                                             Current liabilities:
            Cash                                    $0.5                                 Accts. payable                                      $0.7
            Accts. Rec.                    1.5                             Notes payable                            0.8
            Inventory                      2.5                             Long-term debt                                  2.3
            Fixed assets, net            1.5                             Stockholders' equity                  2.2
            Total Assets                 $6.0                Total Liabilities and Equity    $6.0 (Points : 3.5)

26. Tim borrowed $3,000 to purchase a computer. The loan is to be repaid in 3 equal annual end of year installments. The interest on loan is 10%, compounded annually. What is the loan payment per year? (Points : 3.5)

Question 27. 27. The Podrasky Corporation is considering an $80 million expansion (capital expenditure) program next year. The company wants to determine approximately how much additional financing will be needed if the expansion program is undertaken. Next year the company expects to earn $55 million after interest and taxes. The company also plans to increase its dividends from $10 million to $15 million. If the expansion program is accepted, the company expects its current assets needs to increase by approximately $25 million next year. Long-term debt retirement obligations total $2 million next year and depreciation is expected to be $20 million. No fixed assets are expected to be sold next year. (Points : 3.5)

Question 28. 28. Neiman Company has revenues of $120,000, general & administrative expenses of $37,500, interest expense of $54,500 and depreciation expense of $25,500. The company also purchased a new equipment for $35,000 –This belongs to investment in fixed assets. The firm is in the 40% tax bracket. What would be the firm’s cash flow from operations? (Points : 3.5)

29. TTT Inc has current sales of $40 million. Sales are expected to grow to $65 million next year. TTT currently has accounts receivable of $25 million, inventories of $10 million, and the net fixed assets of $30 million. These assets are expected to grow at the same rate as sales over the next year. Accounts payable are expected to increase from their current level of $15 million to a new level of $22 million next year. TTT wants to increase its cash balance at the end of next year by $5 million. Earnings after taxes next year are forecasted to be $12 million. Next year, TTT plans to pay dividends of $1.5 million. How much external financing is required by TTT next year?
(Points : 3.5)

Question 30. 30. Chase Bank has granted you a ten year loan for $210,000. If your ten annual end of the year payments are $35,500, what is the rate of interest Chase Bank is charging (the interest is compounded annually)? (Points : 3.5)

31. The stock of UCD has just been sold in an initial public offering at a price of $165 per share. One week after this offering, the stock has risen to $195. You believe the stock will rise to $245 over the coming year. You expect UCD to pay a $15 dividend during the coming year. If you require a rate of return of 30%, do you believe this is a good investment at the current price of $195? (Points : 3.5)

      [removed] $75,000.
      [removed] $125,500.
      [removed] $24,500
      [removed] None of the above